Signs of US Labour Market Tightening Keep Euro US Dollar (EUR/USD) Exchange Rate under Pressure

Tightening US Labour Market Weighs on Euro US Dollar (EUR/USD) Exchange Rate

The Euro to US Dollar (EUR/USD) exchange rate slumped notably over the course of the week, coming under pressure as a result of global stock market volatility and increased risk aversion.

This helped to drive the US Dollar (USD) higher across the board, with investors increasingly betting on the prospect of an imminent interest rate hike from the Federal Reserve.

Although the US sees a second government shutdown ahead of the weekend this has not been enough to dent USD exchange rates, with the prospect of a more aggressive Fed outlook still high.

Thursday’s jobless claims data added to the bullish mood of the US Dollar, meanwhile, with the latest drop in claims pointing towards a further tightening of the domestic labour market.

With falling unemployment likely to put additional upwards pressure on wage growth this seemed to improve the odds of a faster pace of Fed tightening, to the detriment of the EUR/USD exchange rate.

Disappointing German Trade Surplus Limits Euro (EUR) Exchange Rates

Commentary from the European Central Bank (ECB) failed to galvanise much support for the EUR/USD exchange rate this week, remaining fairly cautious in nature.

While the ECB’s Economic Bulletin maintained a generally optimistic tone on the subject of domestic economic growth this was tempered by persistently muted inflation expectations.

All in all, the chances of any imminent shift to a monetary tightening bias seemed to remain rather limited, keeping the Euro under pressure.

Investors were also disappointed to find that the German trade surplus had narrowed further than forecast in December, dipping from 23.7 billion to 18.2 billion.

Even though the Eurozone’s powerhouse economy undoubtedly remains in a robust state of health this weaker showing still weighed on the EUR/USD exchange rate.

EUR/USD Exchange Rate to Recover In Spite of Forecast Dip in Eurozone GDP

The EUR/USD exchange rate could find a rallying point next week on the back of fourth quarter Eurozone gross domestic product data.

As long as the currency union on the whole continues to demonstrate signs of growth the downside potential of the Euro should be limited.

If the Eurozone is confirmed to have ended 2017 on strong form, EUR exchange rates are likely to return to a stronger footing, at least in the short term.

Anything short of a severe downside surprise should offer support to the Euro, although focus will also fall on the finalised German consumer price index.

A reminder that inflationary pressures within Germany, and the Eurozone at large, remain rather lacklustre may encourage some fresh selling of the single currency.

Developments surrounding the German government could also provoke jitters in the coming days, with the breakthrough coalition agreement still requiring approval from members of the SPD.

Solid US Inflation Data Forecast to Encourage Further US Dollar (USD) Gains

Next Wednesday’s US consumer price index (CPI) data is likely to provoke EUR/USD exchange rate volatility, potentially increasing the odds of imminent Fed action.

While CPI is not the Fed’s preferred measure of inflation, and recent comments have suggested that the central bank’s primary focus is on wage growth, a strong showing here could still boost the US Dollar.

As forecasts point towards a steady reading of 2.1% this is likely to strengthen USD exchange rates, even if market risk appetite generally begins to recover.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons